Convexity Adjustments for ATS Models

ISEG Advance Working Paper No. 9/2008

25 Pages Posted: 5 May 2009 Last revised: 18 Mar 2016

See all articles by Raquel M. Gaspar

Raquel M. Gaspar

ISEG and Cemapre/REM, Universidade de Lisboa

Agatha Murgoci

Aarhus University - School of Business and Social Sciences

Date Written: 2016

Abstract

We present a general technique to obtain closed form convexity adjustments in an affine term structure set up, for products that are non-standard in terms of the timing or the rate of payment. We show how convexity adjustments are related to affine functionals, and as particular examples, we concentrate on the LIBOR in arrears and constant maturity swaps. Specifically, we contrast the convexity adjustments computed for Vasicek and CIR models, and show that the models produce convexity adjustments of different size and shape across the term structure. We also study in detail the impact of the mean reversion parameter and volatility on the shape and size of the convexity adjustment.

Keywords: affine term structure, convexity adjustments, CMS, LIBOR in arrears

JEL Classification: C02, C65, E43, G12

Suggested Citation

Gaspar, Raquel M. and Murgoci, Agatha, Convexity Adjustments for ATS Models (2016). ISEG Advance Working Paper No. 9/2008, Available at SSRN: https://ssrn.com/abstract=1399323 or http://dx.doi.org/10.2139/ssrn.1399323

Raquel M. Gaspar (Contact Author)

ISEG and Cemapre/REM, Universidade de Lisboa ( email )

Rua Miguel Lupi, 20
room 510
Lisbon, 1249-078
Portugal

Agatha Murgoci

Aarhus University - School of Business and Social Sciences ( email )

Nordre Ringgade 1
Aarhus C, DK-8000
Denmark

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